Management Consultation: Improving Financial Performance
The scenario presented by the prompt here concerns a company that we will refer to as a Silly Putty, Inc. Charged with the responsibility of producing industrial-sized barrels of Silly Putty for distribution to packaging plants on a multinational level, the company finds itself at a cross-roads. As a managing consultant, I have been brought on board to help the company navigate the most difficult point in its long and storied history. With commodity costs rising and revenues suffering in the face of a global recession, Silly Putty, Inc. must make difficult decisions concerning its future.
As the discussion here considers whether survivability is a possibility — and if so, under what conditions — it is necessary conduct a concise environmental scan. For Silly Putty, Inc., the environment is defined by three overarching factors. The first of these is its basic set of cost inputs, labor aside. These cost inputs include supplies, machinery, fuel and facilities. Each of these variables feeds into a process that, according to the discussion prompt, costs the firm roughly $2,000 a day. These costs are compounded by a second variable, which is that of labor. With 100 workers putting in 20 days per month, at a cost of $70 per worker, the firm puts out roughly 6000 units of industrial-sized Silly Putty every month. A third critical environmental factor is the general state of the economy and the impact that this has levied on all multinational firms and especially those which relay on large distribution networks as does our firm. Ultimately, we must acknowledge that certain fixed costs such as those relating to the consumption of fossil fuels and commodities like rubber cannot be altered through any manner of strategic reorientation. This will be a critical driver of the company’s decisions as it moves forward.
As we evaluate the financial performance of the company, we recognize that we are not told a great deal about the sales figures experienced by the firm. That is, it remains unclear exactly how well the company has succeeded from a marketing standpoint. Speaking on a strictly fiscal level, however, we can see that the combination of its fixed costs, likely figuring as a significant proportion of the $2,000 total daily costs noted, and labor costs ($70 per worker, per day), produce expenses which generally overshadow the revenue which can be drawn at an output of $32 per unit across 6000 monthly units moved. This amounts to an output of roughly $192,000 units worth per month. With labor totaling roughly $140,000 per month and the sum largely comprised of fixed costs totaling roughly $40,000 for month, the company is achieving a profit margin of roughly $12K per month. This is a sum that, upon consideration of taxes, fees, licensing, permits and insurance, delivers our company to a breakeven point on a monthly basis. Here, the company is failing to achieve profitability because its costs are simply too high.
Because fixed costs are so high, downsizing may be the best way to help improve the cost variables relating to the company. (Bass & Avolio, p. 213) We are, however, advised to pair downsizing with comprehensive procedural improvements. Cascio (1993) notes that “for long-term, sustained improvements in efficiency, reductions in headcount need to be viewed as part of a process of continuous improvement that includes organization redesign, along with broad, systemic changes designed to eliminate redundancies, waste, and inefficiency.” (Cascio, p. 95)
Still, if it is determined that downsizing might not sufficiently produce a proper ratio of productivity and labor cost, it may simply be so that the company’s model is no longer a viable one. In reality, recommendations for closure and sale denote that a firm with greater overhead to invest in a substantial overhaul of machinery and procedural norms might dramatically reduce fixed costs.
Bass, B.M. & Avolio, B.J. (1994). Improving Organizational Effectiveness Through Transformational Leadership. SAGE.
Cameron, K.S. (2006). Strategies for Successful Organizational Downsizing. Human Resource Management, 33(2), 189-211.
Cascio, W.F. (1993). Downsizing: What do We Know? What Have We Learned? The Executive, 7(1), 95-104.
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